Fireside Friday… with Cboe Europe’s Natan Tiefenbrun

The TRADE sits down with the president of Cboe Europe, Natan Tiefenbrun, to explore the big themes impacting the European equities trading landscape, the importance of a consolidated tape and the evolution of dark pool trading in Europe.

What are some of the biggest themes right now in Europe’s equities trading landscape?

Unfortunately, European markets increasingly lag the rest of the world in terms of liquidity, which creates challenges for financial services firms, but crucially, also for investors and for issuers. Our market infrastructure is complex and expensive and as a result, participants in European markets are continuing to question the incumbency of national exchanges and their associated post-trade infrastructure. Participants are concluding that more competition is required and if the desired outcome is a more open and competitive European market infrastructure, they need to vote with their feet.

Another significant theme, although not new but continues to be impactful, is the increasing quantification of execution. Firms increasingly have a robust framework for experimentation and measurement of execution outcomes and they’re recently seeing results that cause them to reassess the conventional wisdom about how and where to trade. That research is leading firms to migrate passive, displayed liquidity towards pan-European venues such as Cboe. Fundamentally, firms are looking for ways to get best execution, and they’re getting better at measuring it. Whether it’s migrating passive, displayed liquidity to pan-European venues or, for example, increased use of periodic auction order books, firms are better able to demonstrate that such changes produce superior execution results for their customers.

How is Cboe Europe working to make the European markets more attractive to end investors?

We offer a truly pan-European solution via a single access point for trading, clearing and for market data, in cash equities and equity derivatives. That pan-European coverage and simplified access dramatically reduces our participants’ cost in the European equities market and helps encourage people to think of the European equities market as a single, investable universe – which is the vision of the EU’s Capital Markets Union project. We try to embody the principles of that initiative.

The missing piece, perhaps, is in respect of market data. We’re doing what we can, as Cboe, to make pan-European market data more accessible. For example, making our own data available via the cloud, which means lower infrastructure costs for those consuming it. However, the complexity which is hard or impossible for Cboe to solve on a standalone basis, is that investors need to license and consume market data from a couple of dozen different venues with very different terms and technical solutions. That’s something we are keen to see solved for investors.

Why is a consolidated tape so important to the growth of Europe’s capital markets?

Mifid and Mifid II ushered in competition in trading, but it didn’t solve the problem of the potential fragmentation of market data. The consolidated tape is the missing piece in the puzzle that policy-makers and the industry as a whole haven’t been able to solve so far; it’s the unfinished piece of Mifid. Sourcing market data from every different venue, each with their own technical specification and licensing model is incredibly complex and expensive , and it’s a significant deterrent to firms participating in European equity markets.

As a consequence, almost every firm you speak to rations their access to European market data. People are given access to only a subset of the markets or only a subset of the venues, which fundamentally undermines the idea of an integrated and competitive European equity market. A consolidated tape has the potential to make investors look at the EU as a single investable universe, which would have dramatic benefits, especially for companies listed on peripheral exchanges in the EU through the increased exposure they would gain. And then of course, there are investor protection benefits as well as improvements to price discovery through greater democratisation of data.

How do you see dark pool trading evolving in Europe, particularly given the divergent approaches being taken by the EU and UK?

Most of the demands to restrict dark trading and OTC trading in the EU come from the incumbent national exchanges, allegedly because they feel price formation is threatened. Of course, they’ve never presented any evidence to support this argument. Indeed, if price formation was the main concern, you might think those exchanges would embrace a realtime pre-trade consolidated tape so as to democratise access to market data – which they don’t – so in reality their position may be motivated by more commercial considerations.

It is plain to see that Europe has a liquidity challenge relative to other regions, and there are two competing narratives about how to solve that challenge. Our narrative – and that of other pan-European platforms as well as some exchange operators who compete in the US market – is that the best way to attract investors to Europe and to attract their liquidity into multilateral markets is to cater to their needs. In particular, by recognizing that institutional investors need different trading mechanisms to facilitate price and size discovery, and to mitigate market impact and information leakage – absent which the liquidity may never leave portfolio manager’s blotter. The competing narrative, coming from a subset of incumbent EU exchanges, is that regardless of their investment strategy and needs, everybody should be forced into a low latency central limit order book; in other words, that restricting choice is the way forward to attract liquidity. It’s very clear that the UK is pursuing the first path. In the EU, I think policymakers are debating what is the right way forward, but it seems their appetite to restrict choice is waning somewhat as they see the UK committing to the more pro-choice, pro-competition approach.